Calof Inc. acquires 100% of the common shares of Xiyu Company on January 1, Year 4, for the following consideration:

• $798,000 common shares with a market value of 14,000
• A contingent payment of $58,000 cash on January 1, Year 5 if Xiyu generates cash flows from operations of $28,000 or more in Year 4.
• A payment of sufficient shares of Calof common shares to ensure a total value of $798,000 if the price per share is less than $57 on January 1, Year 5

For the cash contingency, Calof estimates that there is a 30% chance that the $58,000 payment will be required. For the share contingency. Calof estimates that there is a 20% probability that the 14,000 shares issued will have a market value of $784,000 on January 1, Year 5, and an 80% probability that the market value of the 14,000 shares will exceed $798,000. Calof uses an interest rate of 4% to incorporate the time value of money.

In Year 4, Xiyu exceeds the cash flow from operations threshold of $28,000 thus requiring an additional payment of $58,000. Also, Calof's stock price had fallen to $56.46 at January 1, Year 5.  Because the acquisition agreement called for a $798,000 total value at January 1, Year 5. Calof must issue an additional 134 shares ($7,560 shortfall/$56.46 per share) to the former owners of Xiyu.

Required:

(a) Prepare Calof's journal entry at  January 1, Year 4to record the investment in Xiyu including any contingent consideration.

(b) Prepare adjusting entries relating to the contingent consideration at December 31, Year 4.

Answer rating: 100% (QA)

a Date Name of Account Debit Credit January1 Investment in Xi... View the full answer